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Friday, July 22, 2016

One of the companies we closely follow for their insight into the overall health of several sectors is Union Pacific Corporation (NYSE:UNP), headquartered in Omaha, Nebraska. As one of the larger transportation companies in the US, their revenue is directly dependent up the health of other industries, and they provide extensive candid detail into each of those areas in their quarterly earnings calls.

UNP reported earnings before the open on July 21, and their ensuing earnings call painted a less than optimistic picture of the overall health in a variety of sectors. There are two driving factors associated with declines and pressures they are reporting: low oil prices and the strong US dollar. Said CEO Lance Fritz, "A soft global economy, the negative impact of the strong U.S. dollar on
exports, and relatively weak demand for consumer goods will continue to
pressure volumes through the second half of the year."

For UNP, the only area of growth experienced this year was in Agriculture shipments (up 2%), however that growth was primarily driven by severe harvest delays in South America and by a high demand for corn in Mexico. Had South America not experienced agriculture problems, even grain shipments would have been down for the year.

The remaining segments were all doom and gloom.

Total volume was down 11%.

Carload volume declined by double digits in coal, intermodal, and industrial products. (Intermodal refers to shipments of the large containers typically carried by rail but then transferred to ship or truck.)

Automotive was down with finished vehicle shipments declining 10%.

The strong US dollar continued to hurt exports with chemicals, plastics, and fertilizer all down for the year. With inflation at or near zero in Europe and with the US likely to raise interest rates either at the end of 2016 and most certainly several times in 2017 and 2018, there is little likelihood of any weakening of the dollar for the foreseeable future.

Low oil prices continue to have a significant negative impact. Rail shipments in that industry were down 23% due to low natural gas prices coupled with high inventory levels. Lower international coal prices (due to the strong dollar) also contributed to that decline.

The other impact low oil prices continues to have is in the chemical and metals industries. Mineral volume declined 32% and Frac Sand declined 43%. Metal (aluminum, steel, etc.) declined 11% due to reduced shale drilling. Expect to see this ripple through other industries as earnings continue to report through the quarter.

The flooding in Texas had a severe impact on construction shipments, down 4%. Intermodal shipments (also impacted by that flooding) were down 16%. We can expect to see that ripple through the trucking and shipping industries as well.

The forecast for the remainder of the year was not very encouraging, either. UNP forecasts agriculture to remain strong since there are expectations for a strong US crop harvest and there is continued weakness in South America. Automotive shipments should also see a boost as the 2017 models come
out, and the industry is currently trending well below the projected
17.5 million vehicles for the year. There are also expectations of a boost in construction and in the housing market as the year progresses. The rest of the industries, however, are still expected to experience headwinds.

UNP still expects the pressures due to low oil prices and low natural gas prices to continue.

They expect drilling to continue to decline, and with it the demand for metals and chemicals will also decline.

Intermodal shipment is also expected to experience pressure due to the impact the strong dollar is having on US exports.

The economy in Europe and China remains weak, adding to global pressures on prices and demand for goods.

This is the first major earnings transcript we've seen this quarter that paints such a gloomy picture of the first half of 2016, however UNP is typically right on the mark in their assessment. Consider the impacts they are citing in related industries when reading their report, since the effects will be readily apparent as other prominent names report earnings over the next two quarters.